Reed Slatkin — the minister whose investment club held no investments

In Santa Barbara County, California, in May 2001, one of the largest Ponzi schemes in American history collapsed into bankruptcy when its operator could no longer meet the redemptions his own fictions had invited. Reed Eliot Slatkin, an ordained Scientology minister and a co-founder of the internet provider EarthLink, had spent fifteen years telling roughly 800 people that he was investing their money through a private “investment club” that returned around 24 percent a year. For most of that period he was buying few securities of any kind. New money paid old investors, fabricated account statements concealed the gap, and the surplus funded failed ventures, aircraft, cars, and art.

The outcome was conclusive. Slatkin surrendered to federal authorities on April 25, 2002, and on April 30, 2002, agreed to plead guilty in the U.S. District Court for the Central District of California to 15 felony counts: five counts of mail fraud, three of wire fraud, six of money laundering, and one of conspiracy to obstruct justice. On September 2, 2003, U.S. District Judge Margaret M. Morrow sentenced him to 14 years in federal prison. He accepted responsibility for at least $254 million in losses.

The scale was extraordinary, but the more precise distinction of the case was its social mechanism. Slatkin raised approximately $593 million, much of it from fellow Scientologists and from the Hollywood figures who moved in those circles, including the actors Joe Pantoliano, Anne Archer, and Giovanni Ribisi. He was not a registered broker-dealer, held no real brokerage for client assets, and submitted statements that purported to show holdings that did not exist. Trust traveled along lines of shared faith and personal referral, and along those same lines the losses spread.

What the Slatkin case demonstrates is not the ingenuity of the fraud but the durability of an old structure when it is wrapped in community. The mechanism was the Ponzi described in 1920. Its longevity came from affinity, opacity, and the absence of any independent party with both the standing and the incentive to ask where the returns came from.